Key Takeaways
- • Mathew Cestar, president of alternative asset manager Arini (described as overseeing $20bn, or £20.03bn/£15.1bn), says private credit's software concentration is "not just a US issue, but it is also an issue in Europe."
- • Cestar cites US private credit exposure to software or software-related loans at 30–50 per cent of the market, and says many European private credit managers are meaningfully overweight to software despite the smaller role of software in the European economy.
- • Arini says it has stayed clear of software companies, arguing that a single sector at 30–50 per cent of exposure constitutes too much concentration and that these loans were "priced for perfection."
- • Cestar expects a shakeout that will differentiate managers by credit quality and sector concentration, which he views as a catalyst for institutionalising the market.
Summary
Mathew Cestar, president of alternative asset manager Arini, told Alternative Credit Investor that the fallout from the so-called "SaaSpocalypse" for private credit extends beyond the United States. Arini oversees $20bn of assets, according to the article. The selloff was triggered at the start of the year when AI developer Anthropic unveiled tools that raised questions about the future of software. The fallout spread to private credit given lenders' and funds' heavy software exposure, hitting US-listed vehicles including those managed by Apollo, Ares, KKR and TPG, with some business development companies still affected almost five months later, according to the article.
While many in the industry have argued that software concentration is primarily a US concern because software makes up a smaller share of European economic activity, Cestar disagrees. He states that US private credit is overexposed, with 30–50 per cent of the market in software or software-related loans, and that European managers are also meaningfully overweight to software because of its perceived attractive credit characteristics. He attributes the sector's growth partly to post-financial-crisis US regulation that pushed software-related lending from banks into private credit, describing software as "one of the most successful strategies in private equity… and credit is the second derivative of that."
Arini has avoided software exposure. Cestar argues that concentration of that scale is excessive and that software loans were priced as the least risky credit, which made them vulnerable. He said the concentration and pricing would likely have caught up with the industry regardless of AI concerns: "it could have been anything really, when you price for perfection." He also said it is still too early to determine where AI disruption will hit software companies.
Cestar expects greater differentiation among managers in the US and Europe, after a period in which managers lent at similar rates and leverage levels. He described the outcome as "on the negative side it is a shakeout; on the positive side it is a real catalyst for continuing to institutionalise this marketplace." Arini focuses on mid-sized companies, which he says is uncorrelated to some risk profiles in institutional portfolios. He added that most European players are generalists and that this market does not reward generalist skill sets.
While many in the industry have argued that software concentration is primarily a US concern because software makes up a smaller share of European economic activity, Cestar disagrees. He states that US private credit is overexposed, with 30–50 per cent of the market in software or software-related loans, and that European managers are also meaningfully overweight to software because of its perceived attractive credit characteristics. He attributes the sector's growth partly to post-financial-crisis US regulation that pushed software-related lending from banks into private credit, describing software as "one of the most successful strategies in private equity… and credit is the second derivative of that."
Arini has avoided software exposure. Cestar argues that concentration of that scale is excessive and that software loans were priced as the least risky credit, which made them vulnerable. He said the concentration and pricing would likely have caught up with the industry regardless of AI concerns: "it could have been anything really, when you price for perfection." He also said it is still too early to determine where AI disruption will hit software companies.
Cestar expects greater differentiation among managers in the US and Europe, after a period in which managers lent at similar rates and leverage levels. He described the outcome as "on the negative side it is a shakeout; on the positive side it is a real catalyst for continuing to institutionalise this marketplace." Arini focuses on mid-sized companies, which he says is uncorrelated to some risk profiles in institutional portfolios. He added that most European players are generalists and that this market does not reward generalist skill sets.
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